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There are several tax types involved - income taxes, estate taxes and inheritance taxes - and two levels of taxation - federal and state.
1. Inheritance tax is imposed on inheritance passed to beneficiaries. However - there is no inheritance taxes on neither federal nor state level in North Carolina.
2. Estate taxes are imposed on the total value of the estate - if the total estate value is large enough - the executor executor of the estate must file federal and a North Carolina estate tax returns and pay any tax due within 9 months after the death. The threshold for decedents died in 2013 is $5,250,000. If your mother's estate is below that value - there is no estate taxes.
3. Income taxes.
As a recipient of inheritance - the person does not need to claim it as income. Regardless of the value. Please see for reference IRS publication 525 page 31 (left column) - http://www.irs.gov/pub/irs-pdf/p525.pdf
Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.
However income received by the estate is taxable. For instance - the interest accumulated in the CD BEFORE your mother's death - is her income - and reported on her tax return.
But interest earned AFTER your mother's death - is income in respect of the decedent (IRD). Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable for the decedent. Income in respect of a decedent must be included in the income of one of the following.
--The decedent's estate, if the estate receives it.
--The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it.
--Any person to whom the estate properly distributes the right to receive it.
The tax rate is based on your total income, filing status, deductions, etc.
You may find federal tax rates on last page of this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf
North Carolina state income tax rates - see here - http://www.dor.state.nc.us/taxes/individual/rates.html
Let me know if you need any clarification or help with other tax related issues.
Thank you for your help. However, the letter from the out of town paralegal (three hours away where my mother died-nursing home, said The interest income was around $116,000.00 on the annuity. She said that is the taxable income that would have to be covered in a fiduciary tax return, and there are expenses that come off that figure. She sent all of this to a private fancy CPA firm costing $400.00 and said me, my son and daughter will be given the final distribution check. I have now after six months of waiting a final check of $65,000.00 and they said it would be filed under the K-1 document. My children (2) received half each $32,000 to be taxed she said. I am totally disabled and receive $11,000 yearly and my husband is a VA disabled veteran and receives around $40,000 yearly from SSI and VA disability with free benefits. We have our taxes done every year and pay no taxes because of our health near retirement. I just need to know how much if any state tax out of $65,000 I have to pay. My husband said we don't work anymore and not under the high class category and to not worry about it but I do. Thanks.
When you have an annuity - the situation is a little different -that is not a cash asset as you stated originally. Any earning inside annuity is not taxable, but when distributed - it becomes taxable.
That distribution received AFTER your mother's death - is income in respect of the decedent (IRD) - which is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable for the decedent.
When distributed - that amount is reported on form 1099R - which will report amounts of total distribution and taxable amount - AND the amount that was withheld:
- from 1099R box 1 - total distribution;
- from 1099R box 2a - taxable part of the distribution - if your mother made any after tax contributions;
- that amount would not be included. Otherwise - amounts in box 1 and box 2a will be equal
- from 1099R box 4 - that is the amount of tax withheld which is credited toward tax liability.
Would you know an estimate I would have to pay taxes on $65,000 if any at all -just an estimate you might know briefly (according to the info I gave you that me and my husband are disabled-36 years of marriage and according to our income. Thank you for you help. You are very professional and wonderful!
I may provide very raw estimation based on some assumptions.
Most likely - you are in 15% tax bracket for federal tax purposes and 7% tax bracket for NC state income tax purposes - so assuming that your mother did not make any after tax contributions into that annuity - and the full distribution is taxable - here are estimations:
-- federal income tax liability - $65,000 * 15% = $9750
-- North Carolina state income tax liability - $65,000 * 7% = $4550
Your estimated net after taxes 65,000 - $9750 - $4550 = $50,700
Please be aware that is a very raw estimate. You need to prepare federal and state income tax returns to determine the exact amount.